Title to real estate is determined by the entire collection of documents that affect a particular property. A thorough review of title issues is a must for both exceptions and requirements.
Buyers and sellers of commercial real estate must perform detailed due diligence on the property and the other parties to the transaction which can delay the closing of the deal because it is much more extensive.
Let’s take a closer look at title exceptions and requirements and how failure to thoroughly examine all issues can cause major project delays.
There may be a document recorded on the title (an exception) that limits or prevents certain developer’s actions. This could include use restrictions or access issues.
When a buyer accepts an exception to title, he or she has accepted whatever has been withdrawn from the bundle of rights or whatever burden that exception might be imposing on the property.
Some exceptions include existing and future liens for unpaid real estate taxes and water and sewer charges not due and payable as of the date of the closing. There are also present and future zoning, building, environmental and other laws, ordinances, codes, restrictions and regulations of all governmental authorities having jurisdiction with respect to the property.
During the review of title, the purchaser and their counsel must review all documents that affect the title to the property including easements, deed restrictions, existence of any monetary or other liens, and other matters which may impact the purchaser's intended use of the property.
Many times, a declaration that is recorded against the property will outline use restrictions and other matters which could greatly affect how a purchaser will use the property after closing. Easements could be located in areas that make it difficult or risky to build certain structures.
There may also be something the title company needs (a requirement) that is difficult to obtain, such as evidence of probate or removal of liens. Meeting these requirements can be lengthy and complicated, adding another hurdle to the property purchasing process.
The reason for such thorough review is that title defect can significantly impede your ability to purchase or resell your property. In some cases, banks may even refuse to provide financing for commercial real estate that has a defective title.
Prior owners of your property may not have been meticulous bookkeepers or bill payers. Even though the former debt is not your own, banks or other financing entities can place liens on your property for unpaid debts ever after you have closed on the sale.
While the chain of title on your property may appear sound, it’s possible that a prior deed was made by an unauthorized party. These instances may affect the enforceability of prior deeds, affecting prior and possibly present ownership.
Instead of a contract between two people, a commercial real estate deal involves one or more contracts between two or more legal entities. Because these deals are expensive, all parties want to limit their liability and often create legal entities for the sole purpose of owning a piece of commercial real estate.
For every entity such as a corporation, LLC, or LLP involved, additional steps must be taken to verify their fitness and ability to conduct the transaction.
Having commercial property title insurance covers most real property as well as the items or fixtures associated with conducting routine business. In most cases, disputes can be avoided by having an attorney thoroughly review a commercial property title insurance contract.